The Payroll Tax Cut: A Stimulus That Progressives Should Oppose

President Obama is proud of the fact that he was willing to bargain away the core of the country’s social safety net to reach an agreement with the Republicans on the debt ceiling. According to accounts of the negotiations, he had agreed to raise the eligibility age for Medicare to 67. He had also agreed to a change in the cost-of-living adjustment formula for Social Security that would reduce benefits by an average of more than 3 percent. This is in addition to the cuts in Medicaid and other programs that would also have been part of the deal.

Fortunately the Republicans walked away because of the tax increases in the deal. This is not the first time that the Republicans may have inadvertently saved Social Security. Their impeachment of President Clinton put an end to any plans that he had for privatizing the program.

However, we cannot count on Republican intransigence to always come to the rescue of Social Security. We know that we have a president in the White House who is perfectly willing to bargain away the program if the occasion arises.

This is important background because it seems that an extension of the payroll tax cut into 2012 is the most likely form of stimulus currently on the table in negotiations between President Obama and Congress. This would mean extending the 2 percentage point reduction in the employee side of the payroll tax for another year. If the current arrangement is left in place, the Social Security trust fund will be credited with an amount equal to the tax cut so that the program’s finances are left unaffected.

In principle, this would be a reasonable form of stimulus. The distribution of the tax cut is relatively progressive, albeit not as progressive as the Making Work Pay tax credit that it replaced. It gives workers a tax break equal to 2 percent of their wages up to the payroll cap of roughly $108,000. This means that the tax break going to Wall Street types will be no larger than what a senior firefighter might get.

Since most of the money will go to middle-income and low-income people, it is likely that a large portion will be spent. This makes it much better stimulus on a per-dollar basis than the extension of the Bush tax cuts.

However, there is a serious political problem with tying the tax cut to Social Security. While the deal is that the trust fund will be unaffected by the tax cut, the question is what happens when the extension ends. Several Republicans in Congress have already publicly said that they would oppose restoring the payroll tax to its former level, since that would be a tax increase. And increasing taxes is the most deadly sin for many Republicans.

This raises the possibility that Republicans will try to keep the lower Social Security tax rate in place indefinitely. If there was a commitment to permanently replace the program’s shortfall with general revenue, the loss of the payroll tax revenue would not matter. However, there is no such commitment.

Obviously the Republicans want to reduce Social Security’s revenues so that they can turn the fictional Social Security crisis into a reality. If the program were to permanently lose the revenue from 2 percentage points of the payroll tax then Social Security would first face a shortfall in a bit more than a decade, rather than the quarter century of full solvency currently projected by the Trustees. And the size of the projected shortfall would be instantly doubled.

This scenario would not be a problem if President Obama had demonstrated a firm commitment to Social Security and indicated his willingness to go to the mat to protect the program. But he has done just the opposite. He has told the world that he is such a reasonable guy he is prepared to make major cuts to Social Security.

For this reason there should be no deal on a stimulus that involves a payroll tax cut. If the Republicans are attached to giving an amount equal to 2 percent of wages to workers then this could be done under another name. We can call it a refundable income tax rebate or anything else that people like. The only reason to call it a payroll tax cut is if the intention is to use this as a foot in the door for attacking Social Security.

The economy desperately needs stimulus and we should find every possible way to boost employment. It is not fair that millions of workers are unemployed or underemployed because of the incompetence of people who make economic policy. But risking the future of Social Security to temporarily bring about a modest reduction in the unemployment rate is not good policy.